Abstract

Investors do not have a single investment horizon: they have multiple investment horizons at the same time. Every long-term investor is therefore also a medium-term investor and a shortterm investor. This fact has important implications for asset allocation and portfolio optimization. The total portfolio should be viewed as an aggregation of multiple sub-portfolios, each of which has a different investment horizon. The different sub-portfolios have different investment objectives, expected returns, and liquidity requirements, and may even be based on different capital market assumptions. The size of each sub-portfolio is determined by the spending requirements of the investor. In this framework, risk is not standard deviation but “expected loss,” i.e., the probability of loss (either in nominal terms, or after inflation, or after inflation and spending) multiplied by the amount of the loss.